What is a NAICS Code?

what is a naics code

Small businesses in the United States are divided into two main sectors: the goods-producing sector and the service-providing sector. Each of these sectors has a lengthy list of business industries. Let us use the marketing industry to explain this in more detail. There are close to 30 different marketing, public relations and advertising industry classifications that businesses in the marketing industry can choose from. A marketing consulting company, for example, falls within the service-providing sector in the marketing consulting services industry.

Your small business, whether it produces goods or sells services, also falls within a specific industry. The standard system for classifying small businesses according to their industry is the North American Industry Classification System (NAICS). The NAICS has unique codes for all types of business industries, even yours. NAICS is one of many business acronyms that you have probably heard about. If not, you might be wondering, just what is a NAICS code? Well, this Balboa Capital blog article takes a good look at the NAICS and has all of the important information you need to become familiar with.

How the NAICS started.

The United States, Canada and Mexico worked together to develop the NAICS, which rolled out in 1997. The goal was to create a system that covers more industries than the Standard Industrial Classification (SIC) system, and organizes them into more applicable business sectors. NAICS codes can be used seamlessly throughout North America, which is a tremendous benefit. A comprehensive manual with up-to-date NAICS codes was published in 2017; it can be accessed on the United States Census Bureau website. The NAICS is updated as needed with codes for new and emerging industries such as biotechnology and e-commerce.

Although the federal government no longer maintains SIC codes, which were last updated in 1987, they are still widely used in the United States to categorize small businesses by their industry and/or specialty. That said, SIC codes are still being used by some credit reporting agencies, government agencies, and marketing list providers.

NAICS code size standard.

As mentioned earlier, NAICS codes are assigned based on a particular business industry. Additionally, a company size standard accompanies every NAICS code. This is determined by one of two size-related factors: average annual revenue or number of employees. For example, if you own a full-service restaurant, your NAICS code is 722110, and your size standard is $7 million in annual revenue. So, if your restaurant generates less than $7 million each year, it is categorized as a small business under NAICS code 722110. The complete list of NAICS code size standards is available on the Small Business Administration (SBA) website.

How to get a NAICS code.

Many small businesses specialize in more than one type of product or service. As an example, a coffee shop might have an in-house bakery and kitchen, allowing it to serve breakfast each morning. The coffee shop also sells baked goods to local restaurants, and sells them online. In this case, the coffee shop can have more than one NAICS code because it has several streams of revenue. This is a tremendous advantage that NAICS codes offer to business owners like you. Multiple codes can make your small business more competitive and open the door to new business opportunities in markets outside of where you operate.

NAICS codes are assigned by you, not by a government entity or small business organization. You can get your code online or through a third-party that helps business owners obtain them. However, the list of industries and their respective codes is lengthy and takes time to read, so do not pick a code until you have reviewed all of the options. You need to choose the code that best exemplifies what your business is all about, and what products or services it provides.

Benefits of having a NAICS code.

Depending on the type of business you have, your NAICS code might present you with some nice benefits. For example, many lenders use NAICS codes when reviewing small business loan applications, and having a code can boost your chances of getting your loan approved. Reason being, the lender will see your code and know instantly if they lend to businesses in your industry.

Next, you might be able to land contracts through government agencies and trade associations if you are an SBA-certified business with a valid NAICS code. Agencies and associations frequently award contracts to businesses in various industries. This helps drive business growth on Main Street USA.

Finally, having a NAICS code can come in handy when tax season rolls around. Your code will ensure that your company’s tax return is similar to other companies’ tax returns in your distinct industry. If you have the wrong NAICS code, or never got a code, the IRS might compare your tax return to companies’ returns in an industry unrelated to yours. This can result in an IRS audit, which is something you want to avoid at all costs.